An important provision of the CARES Act, the Paycheck Protection Program (PPP) received an additional $310 billion in funding from Congress on April 24, 2020, after running out of the $349 billion in funds in the initial tranche. With a massive $659 billion in total funding, the program offers loans that have the possibility of being completely forgivable, if spent in the way the government has mandated.

Clearing Up Lingering Confusion Around PPP Funds

Because of the speed in which funds were deployed, many businesses have already received loan approval or even funding. However, there's still quite a bit to navigate and many businesses have questions about their funds. We put together answers to the top ten questions about the next phase of fund deployment and forgiveness estimation for the PPP.

1. Should we use a separate bank account for the PPP Loan Proceeds?

The short answer is yes. We said it in a previous post, but it bears a second mention because we believe it will help immensely in the forgiveness process:

It's a best practice to put PPP funds into a separate bank account and deploy them only for approved expenses.

This will help create a clear audit trail for the use of the funds to maximize loan forgiveness. To further assist in the forgiveness process, it would be beneficial to ensure that your accounting system is designed to fully track the PPP proceeds and qualifying expenses.

2. Which Payroll Costs, Utilities, Rents, and Interest expenses qualify as forgivable?

Qualifying payroll costs include salaries and wages up to a cap of $100K per year ($100K annualized is $15,385 per employee over the eight-week covered period). In addition, employer-paid health insurance, retirement contributions, and employer- paid state and local unemployment taxes are included.

Employer-paid FICA is not included. Rent is defined as payments under lease agreements in place before Feb 15, 2020. The legislation does not mention an exclusion for related-party rent but does exclude mortgage principal payments. Utilities include electricity, gas, water, telephone, and internet for services beginning before Feb 15^th, 2020.

A transportation utility is also included and has been defined as fuel cost for business vehicles. Interest expense can be for mortgage debt and financing arrangements that were entered into before February 15, 2020, in which personal property and/or real estate was used as security. We interpret this to mean mortgage interest and (we think) equipment interest.

3. When does the eight-week covered period begin for using the loan proceeds?

The covered period begins when the loan is funded, not approved, or closed. As a side note, the AICPA and many other industry groups have asked the Treasury and Small Business Administration for clarification to this rule and others. With this rule specifically, they are recommending that the eight-week covered period, within which to spend the loan proceeds to qualify for forgiveness, be extended to provide for more flexibility. As of this writing, there have been no new interim rulings in this regard.

4. The CARES Act states that “Costs incurred and payments made” in the eight-week covered period are eligible for loan forgiveness. What does that mean?

This is still a gray area. The language leaves us to guess intent. Looking strictly at the wording of the written rule, this would only include expenses that were actually incurred and paid during the covered period. Thus, each business would need to evaluate each qualifying expense and determine the actual period that the expense was incurred. This will lead to a bifurcation of various invoices received and payments made, as most expenses will not align exactly with the covered period.

This would also lead to some form of “true up” or prepayment of expenses to ensure business owners physically pay expenses incurred towards the end of the covered period, before the last day of the eight weeks. In short, we are right there with you wondering if it is expenses incurred, paid, or both. Hopefully, the Small Business Association (SBA) and Treasury clarify this soon.

5. If I don’t hit the 75% usage of the funds on payroll costs, does that cancel my forgiveness option?

Seventy-five percent is not an all-or-nothing option. The loan proceeds that are used for payroll costs will be applied in the forgiveness formula. If usage for payroll is below the 75% threshold, the amount below this usage test may be ineligible for forgiveness.

6. How is loan forgiveness reduced by employee headcount?

You will be required to do an FTE head-count for a look-back period. Average FTE head-count will also be tracked during your 8-week covered period. If there is a reduction in your FTE headcount, the current headcount divided by your former headcount will reduce forgiveness by that percentage. With a few exceptions and independent of your 8-week period, if employee head-counts are restored by June 30^th, 2020, the FTE forgiveness reduction does not come into play. There are still questions remaining on this front as many businesses will have trouble restoring former operations and employment levels.

7. Are there any other loan forgiveness reductions?

There is one last forgiveness test requirement. Reductions to payroll by more than 25% per employee as compared to the most recent full quarter ended, will reduce the loan forgiveness further. The amount of wage reduction above 25% is the amount that is not forgiven. For purposes of this test, only employees making less than $100K per year are included.

8. So how do I calculate loan forgiveness?

There are several loan forgiveness calculators and templates available. We encourage you to review them or contact us to assist you in determining loan forgiveness amounts. Some lenders have already provided borrowers with worksheets to assist with the required forgiveness calculations. At the time that forgiveness processes commence, each borrower will need to work with their lender on the exact calculations. Keep in mind that guidance may change as the actual forgiveness period nears.

9. How does the loan repayment work?

When a business executes a loan agreement, they will sign documents based on the fully amortized schedule of the funds given, plus a 6-month deferment at 1%. They will essentially have 18 months to pay the loan in full. At some point, before the repayment term begins, forgiveness must be applied for with the lender. Forgiveness would reduce the original principle amount and any corresponding interest that accrued during the deferral. A new amortization schedule and payment amount will be produced for the 18-month payment plan outlined above. The lender has 60 days from the date the borrower applies for forgiveness to grant the change in the loan.

10. Recent news reports show that some large companies are returning their PPP Loans. Does this affect my company?

There has always been the certification requirement that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

On April 23, 2020, the SBA, in consultation with the Department of the Treasury added clarification to this in their FAQ #31

Then, on April 28, 2020, the SBA issued FAQ #37 which clarifies that private companies with adequate sources of liquidity to support ongoing operations fall under the same guidance provided in FAQ #31. Secretary Treasurer Mnuchin has also said that small business loans above $2 Million will receive a full audit.

Safe-Harbor To Return PPP Funds

There is a safe-harbor window until May 7, in which any company can return the funds without any adverse action if they find that the funds are not necessary under current circumstances and recent guidance. On May 5, 2020, the SBA issued FAQ #43 which extends the safe-harbor date to May 14, 2020.

We advise that you follow directives from various lending institutions, asking borrowers to evaluate their “need” status and document those reasons at three date periods:

1. Date when borrower applied for the PPP loan
2. Date when borrower received PPP proceeds
3. Date 8 weeks following receipt of borrower funds

Please note that this guidance is not clear and in fact subjective when it comes to the definition of "current economic uncertainty" and "additional sources of liquidity". We are hopeful that Treasury and the SBA will provide clearer definitions in order to assist businesses in properly certifying the need for their PPP loans. In their FAQ #43, the SBA did say that they intend to provide additional guidance prior to May 14, 2020 on how they will review the certification requirement.

Get Help With Funding

We understand that during these times there can be information overload, especially when the world is changing around us on a seemingly daily basis. MRPR stands ready to help you understand the PPP or aid you in obtaining sources of additional capital or financing.